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FinCEN issues final beneficial ownership reporting rule
October 2022
In brief
Treasury’s Financial Crimes Enforcement Network (FinCEN) on September 29 issued a final rule implementing the Corporate Transparency Act’s (CTA’s) beneficial ownership information (BOI) reporting provisions. CTA, enacted in January 2021, targets tax fraud, terrorism, and money laundering by requiring US-formed corporations and limited liability companies (LLCs) and certain foreign-owned entities doing business in the United States to report to FinCEN certain information about their beneficial owners. See our insight, Congress enacts enhanced beneficial ownership reporting for US-formed entities, for more information.
Observation: For many years prior to passage of CTA, several key policy makers on Capitol Hill had focused on selective cases of the use of beneficially owned assets in certain tax planning transactions. That focus continues with the implementation of the legislation.
The final BOI reporting rule is intended to enhance the ability of FinCEN and other agencies to provide information to government agencies, federal and state officials, and financial institutions to protect US national security and the US financial system from illicit and criminal activity while also aiding in the standardization and transparency of information.
FinCEN seeks to balance the benefits and burdens of the required reporting for the approximately 32.6 million reporting companies estimated to be subject to the final rule in the first year that it is effective and the additional five million companies estimated to become subject to it in each subsequent year. FinCEN plans to develop compliance and guidance documents to assist reporting companies in complying with this rule.
The final BOI reporting rule is effective beginning January 1, 2024. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025 to file initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file initial reports.
Action item: Reporting companies subject to the final BOI reporting rule should prepare now to understand the nature and breadth of their potential reporting obligations. Even entities that expect to be exempt from the reporting requirements (as noted below) will need to conduct significant analysis of technical data and operations to determine whether each separate entity is exempt from the reporting requirements.
The final BOI reporting rule describes the reporting companies that must file a BOI report, what information must be reported, and when a report is due. Specifically, the rule requires reporting companies to file with FinCEN reports that identify the entity’s (1) beneficial owners and (2) company applicants.
Reporting companies
The final BOI reporting rule applies to (1) domestic reporting companies and (2) foreign reporting companies. A 'domestic reporting company' is a corporation, LLC, or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or tribal jurisdiction. A 'foreign reporting company' is a corporation, LLC, or other entity formed under the law of a foreign country that files a document with a secretary of state or any similar office to register to do business in any state or tribal jurisdiction. 'State' is defined to include the District of Columbia and any US territory or possession.
Subject to certain exemptions, reporting companies include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships generally created by a filing with a secretary of state or similar office. Legal entities not created by the filing of a document with a secretary of state or similar office (e.g., certain trusts) generally are excluded from the definition of reporting companies. The reporting rule exempts 23 types of entities from the definition of 'reporting company.'
Observation: Businesses operating in the financial services sector, where numerous separate entities may be created to handle risk issues or legal requirements, should analyze how their ownership structure may affect their BOI reporting requirements.
In addition, companies establishing corporate and personal entities need to assess their Anti-Money Laundering (AML), Sanctions and Know Your Customer (KYC) programs, accordingly.
BOI reports
A reporting company filing a BOI report must identify itself and each beneficial owner’s (1) full name, (2) date of birth, (3) current street address, and (4) unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document). Reporting companies created after January 1, 2024, must provide the same information for company applicants. Individuals who provide their information to FinCEN directly may obtain a 'FinCEN identifier,' which can be included on a BOI report in lieu of their information.
Reporting companies have 30 days to report changes to the information in their previously filed BOI reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
Beneficial owners
The final BOI reporting rule provides that a 'beneficial owner' includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company or (2) owns or controls at least 25% of the ownership interests of a reporting company. The rule exempts five types of individuals from the definition of 'beneficial owner.'
The final reporting rule sets forth a range of activities that could constitute 'substantial control' of a reporting company, including acting as a senior officer, having authority over the appointment or removal of senior officers or a majority of the board of directors, and having substantial influence over important matters of the company. The final rule exempts from the reporting requirement large operating companies with 20 or more full-time employees, more than $5 million in sales, and a physical operating presence in the United States.
The final rule provides standards and mechanisms for determining whether an individual owns or controls 25% of the 'ownership interests' of a reporting company. These definitions are intended to account for the various ownership or control structures reporting companies may adopt, including ownership interests held in trust.
Company applicants
The final BOI reporting rule defines a 'company applicant' as the individual who either (1) directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States, or (2) is primarily responsible for directing or controlling the filing of the relevant document by another. However, the rule does not require reporting companies existing or registered at the time of the effective date of the rule to identify and report their company applicants. Reporting companies formed or registered after the rule’s effective date do not need to update company applicant information.
Data protection
The BOI provided to FinCEN must be held under strict data protection protocols, with the use outside of Treasury functions limited to authorized law enforcement activities. FinCEN continues to develop the infrastructure to administer these requirements in accordance with CTA’s strict security and confidentiality requirements, including the information technology system that will be used to store BOI: the Beneficial Ownership Secure System (BOSS).
Observation: The use of BOI for tax administration purposes is expressly permitted by CTA. This may be interpreted to allow the IRS to exchange such information with other tax authorities where permitted under a bilateral or multilateral treaty or tax information exchange agreement.
Future rulemaking
FinCEN plans to issue two more sets of rules to (1) establish rules for who may access BOI and for what purposes, as well as what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule following the promulgation of the BOI reporting final rule.
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